Shadow Income

March/28/2010 16:14PM
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Every night the local new channel runs a sad story about some one losing their home. It’s always the bank or the failure of the government that causes this poor soul to have to leave their dream house behind. In most cases the person is running a business out of the home. Must not be drugs, since the cops always collect thousands in cash when they bust one of those.

The truth of the matter is simple. In most cases the person losing the house could never afford the house. Probably put little, if anything, down on the house. You, the taxpayer, are really the loser in this situation.The mortgage was guaranteed by Freddie or Fannie and the government will eat the loss.

Someone once told me there was a benefit to illegal aliens in America. They have social security numbers from deceased Americans. They, and their employer, are paying into social security money that will never be collected. That prompted me think about the housing situation and see if I could find a pony in the pile of foreclosure manure.

I did and I call it shadow income. My example comes from: Irving Home Brokers, Irvine California, J.P.Morgan Private Bank estimates. It goes like this. A homeowner in Irvine, California took out a first and second mortgage and didn’t put any money down. He then refinanced both into an Option ARM, took out a home equity loan, then in late 2006, went delinquent.

Purchase price, Oct 2003 $465,000
First Mortgage $372,000
Second mortgage $93,000
Down Payment none

Option ARM refinance
Dec 2004 $486,500
Home equity loan Feb
2005 $67,000

Initial delinquency date: Oct-06
Notice of default: Jan-07
notice of sale May-07
notice of rescission Aug-07
notice of default Aug-08
notice of sale Dec-08
Notice of sale Feb-10

In this case, a true case, the Homeowner extracted $88,500 is cash from this deal. There was $83,025 in unpaid interest. The homeowner lived for 41 months rent-free. Just guessing at the monthly rent on what was a $500K house in 2004, one would guess close to $200K. The $88,500 and the $200,000 add up to $288,500 in shadow income. Not to mention, the local taxing district got stiffed for the property taxes for nearly four years or longer.

Is your bleeding hearth still bleeding for these poor souls. Living between 300-600 days, rent-free, and banking that savings. Your government, the media, and many compassionate people are on the side of the poor people losing their homes.

But, in truth, they should be trying to speed up the process to reduce the shadow income. That’s in the best interest of the local taxing authority, the guarantee from Freddie or Fannie, and the housing market. Someone living rent and tax free is either banking money or avoiding the job market, or both.

After really thinking about it and seeing an example, thanks to Chase, I’m for moving ahead and fixing the problem without delay. Stop the squatters.

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